Pros and Cons of Investing in Unilever

11/22/2013 12:00 pm EST


Royston Wild

Equity Market Sector Correspondent, Shares Magazine

This global leader has experienced a slump in growth and sales, however, Royston Wild of The Motley Fool UK, thinks a detailed evaluation is required before deciding if the cons outweigh the pros.

Making stock market selections are never black-and-white decisions, and investors often have to plow through a mountain of conflicting arguments before coming to a sound conclusion.

Today I am looking at Unilever (LSS:ULVR) (NY:UL) and assessing whether the positives surrounding the firm's investment case outweigh the negatives.

Emerging markets continue sliding

Unilever spooked the markets in September when it warned of slowing demand in emerging markets, a theme which was underlined in last month's interims.

The household goods leviathan saw underlying sales rise 8.8% during January-September, but during the third quarter these rose just 5.9%, illustrating a significant downshift from growth of 10.3% seen during the first half of the year.

Near-term recovery expected

The heavy revenues' dip in these regions is undoubtedly a worry—developing nations account for more than 60% of total sales, after all—but Unilever is optimistic that performance should be much improved during the final quarter of 2013.

Looking further ahead, the firm has quite rightly commented that "emerging markets continue to be the main driver of our growth and, despite the current slow-down, they remain a significant growth opportunity." Indeed, the decision to hike its stake in Asia's Hindustan Unilever (HUVR:IN), to more than two-thirds in July, underlines the confidence the firm has in these markets to deliver growth.

Earnings expected to slide

Still, the City's brokers expect profits to come under heavy in the immediate term, and the current consensus is for earnings per share to slump 18% in the current year, before rising a modest 5% in 2014.

And although Unilever currently deals on a prospective P/E multiple of 18.7—comfortably below a forward average of 27.1 for the entire food producers and processors sector—many believe that the firm's murky near-term earnings outlook warrants a share price correction, which would bring the stock's P/E reading closer to the broadly-considered value reading of ten.

A stunning brand stable

But in my opinion, Unilever's portfolio of class-leading brands warrants this heady multiple. The company's stable of heavyweight labels—which includes the likes of Dove, Cornetto, Knorr, and Domestos—are helping to drive the move into emerging markets, while new product innovations under these banners are also helping to underpin sales growth.

As well, the formidable pricing power of these brands is also enabling the company to continue building margins, a crucial quality when concerns over future revenues abound.

A stellar stock pick

So, in my opinion, Unilever is in great shape to hurdle the current financial cooling in developing regions and punch solid long-term revenues growth as these economies recover. Through its enviable catalog of household brands, and extensive experience in these key markets, I think that Unilever is in prime position to benefit from rising spending power here.

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